Even if your tax situation is fairly mundane and you have your taxes withheld at source, there are some events in your life that can generate taxes. Understanding the tax implications of these events ahead of time can help you plan your finances better, and can, in some cases, save you from paying taxes altogether.

See: Personal Income Tax Guide

Cashing out an Old 401(k)
If you have money sitting in a 401(k) plan from an old employer, you may be tempted to cash it out so you don't have to deal with it any longer. In fact, if the amount is less than $5,000 and you have provided no other instruction to the employer, they may cash it out for you. However, once funds leave the protection of a traditional 401(k), they become taxable and you may also owe a penalty on early withdrawal if you are less than 59.5 years old. To avoid this, have old 401(k) plans rolled directly into your new employer's plan or into an individual retirement account (IRA). There are no tax consequences of a direct rollover. If you have already cashed it out, you can avoid both tax and penalties if you re-deposit it to a new plan within 60 days. Of the withdrawal, 20% will be withheld for the IRS, so you will have to find those funds elsewhere to deposit the whole amount to the new plan. (To learn more, check out 6 Problems With 401k Plans.)

Selling Your House
If you have a significant capital gain on the sale of your main residence, you may be on the hook for taxes. The IRS allows you to exclude the first $250,000 ($500,000 for couples who own the house together and file jointly) of the gain from your taxable income, but in most cases, anything over that is taxable. If you have been depreciating part of your house for business or rental purposes, you may also owe back tax on the depreciated amount. To minimize the tax implications, work through the calculation of the gain with a tax professional to make sure that you are including all of your capital improvements and additions over the years, which forms part of your cost base.

Rebalancing Your Investment Portfolio
Many new investors are unaware of the tax implications of buying and selling in their portfolios. In non-retirement portfolios, you are required to calculate capital gains and losses on the sale of any securities, even if you reinvest the proceeds within the portfolio. Starting in 2011, brokers are required to report capital gains to the IRS to ensure that they are reported fully and accurately. The timing of gains and losses can impact the overall tax liability for the year, so ensure that you plan your sales strategically. (For related reading, see Selling Losing Securities For A Tax Advantage.)

Selling Your Collectibles
Most household items you buy for personal use decrease in value quickly, so that, when you sell them at a yard sale, for example, you have a loss. This loss is not claimable for tax purposes. However, some items, such as collectibles and artwork, appreciate in value over time. You are required to report the gain of the sale of these types of items, wherever you sell them. For example, if you have collected baseball cards since you were young and sell the entire collection for $5,000, you have a capital gain of $5,000 minus what you paid for the cards originally and any expenses you have incurred in managing, appraising or selling the collection.

The Bottom Line
There are many life events that can trigger tax consequences, and proper tax planning can save you a substantial amount of money. A tax accountant or lawyer can help manage the tax effects of major transactions. (For more information, read 7 Year-End Tax Planning Strategies.)

Related Articles
  1. Tax Strategy

    Profit from Art with a Charitable Remainder Trust

    With a CRUT, art collectors can avoid capital gains taxes on the sale of art– while also leaving their favorite charity a legacy.
  2. Investing

    3 Healthy Financial Habits for 2016

    ”Winning” investors don't just set it and forget it. They consistently take steps to adapt their investment plan in the face of changing markets.
  3. Retirement

    Early Out: A Realistic Plan to Retire Younger

    If you want to retire ahead of schedule, it'll take some extra planning.
  4. Mutual Funds & ETFs

    Which Fund Share Class is Best for Retirement?

    Mutual funds are a popular investment for retirement. Here's how to choose the best share class when investing in them.
  5. Retirement

    6 Robo-Advisors That Require Little to Start

    There are many well-regarded robo-advisor options that come with minimum investment amounts. Here are snapshots of a handful of them.
  6. Saving and Spending

    What Baby Boomers Need to Know About IRA RMDs

    Mandatory minimum distributions from traditional IRAs and qualified plans cannot be avoided. But there are several ways to minimize their impact.
  7. Your Clients

    How to Construct an Annual Review for Clients

    One of the best things that advisors can provide to clients is an annual review of their financial situation. Here are some guidelines.
  8. Retirement

    Roth IRAs Tutorial

    This comprehensive guide goes through what a Roth IRA is and how to set one up, contribute to it and withdraw from it.
  9. Mutual Funds & ETFs

    4 Mutual Funds You Wish You Could Include In Your 401(k)

    Discover four mutual funds everybody wishes were in their 401(k)s. Learn which five-star-rated no-load funds leave their competition in the dust.
  10. Term

    How Traditional IRAs Work

    A traditional IRA is a tax-advantaged retirement account that includes stocks, bonds, mutual funds and other investments.
RELATED FAQS
  1. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  2. How do I file taxes for income from foreign sources?

    If you are a U.S. citizen or resident alien, your income (except for amounts exempt under federal law), including that which ... Read Full Answer >>
  3. How Long Should I Keep My Tax Records?

    The Internal Revenue Service (IRS) has some hard and fast rules regarding how long taxpayers should keep their tax records. As ... Read Full Answer >>
  4. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  5. Will quitting your job hurt your 401(k)?

    Quitting a job doesn't have to impact a 401(k) balance negatively. In fact, it may actually help in the long run. When leaving ... Read Full Answer >>
  6. Can a 401(k) be taken in bankruptcy?

    The two most common types of bankruptcy available to consumers are Chapter 7 and Chapter 13. Whether you file a Chapter 7 ... Read Full Answer >>
Trading Center